The new Counter Balance report ‘Hit and run development – Some things the EIB would rather you didn’t know about its lending practices in Africa, and some things that can no longer be covered up’ reveals how the European Investment Bank’s use of intermediated loans and private equity funds facilitates corruption and tax evasion. The report concludes that the use of these lending tools in developing countries 'goes against any kind of development logic'.
The European Investment Bank (EIB) increasingly uses intermediated loans or global loans – up to 37% of its non-EU lending amount – as an integral part of its development lending. By pre-approving projects as a group instead of appraising them individually, the EIB is making it exetremely difficult to track the final use of the money. At the same time the EIB is conducting an increasing amount of its development investing via private equity. “This means a further shift away from traditional project finance to investments via entities that clearly prioritise profit maximisation over concerns about sustainable development”, Antonio Tricarico, the author of the report argues.
While the EIB may insist that it selects 'trusted and experienced partners' for such investments, the evidence suggests otherwise. The cases presented in the report suggest EIB funds are misused for sinister practices such as tax evasion, money laundering and personal enrichment – explaining the title of the report. “The EIB’s due diligence and project partner selection for those cases have been compromised casts doubts not only on how fit for purpose these newly favoured investment models are but also on the overall development effectiveness of the EIB’s activities in developing countries”, says Antonio Tricarico.
When it comes to the transparency of the EIB’s intermediated development finance, a further glaring failing is thrown up by the report: the bank provides next to no information on where this money ends up, principally because it is not obliged to provide rigorous feedback. Furthermore the EIB appears reluctant to encourage intermediaries to disclose at least some details regarding the global loans they have been allocated. This inflexible stance thus ignores the overwhelming public interest over commercial confidentiality in knowing how European public money is ultimately being deployed.
All this calls into major question the EIB’s fulfillment of its legal development responsibilities. Under the European Commission’s new proposal for its mandate to lend outside the EU, the EIB must 'foster: sustainable economic, social and environmental development of [developing] countries; their smooth and gradual integration into the world economy; the campaign against poverty; as well as compliance with objectives approved by the EU.' When development money is given to unaccountable financial bodies with no development interest or experience, untracked by the EIB and resulting in alleged corruption and money laundering, it is hard to see how the EIB is meeting its legal obligations under its mandate.
The report suggests that support for financial intermediaries 'should be restricted only to local financial institutions which are equipped to implement a pro-development approach […] and will report all relevant information to the public in Europe and developing countries.' Besides it is argued that instead of participating in private equity funds, '[…] it would be easier and more logical for the EIB to support a direct equity participation into local companies that are judged able and likely to support wider development goals through their work in a transparent and accountable way.'
'While the EIB’s understanding and acceptance of its development role may be growing, knowledge and understanding among decision-makers of some of the EIB’s obscure and opaque lending practices in Africa remains thin – this report seeks to address that, right when in the very next weeks the European Parliament is asked to agree on a reviewed lending mandate of the Bank outside the EU', the author explains.